People often ask, "What’s the best day to retire?" There is only one answer that will fit everyone and every situation. That answer is "It depends." In fact, the best day to retire depends on many factors; factors that can lead different people to reach different conclusions.
Many people choose to retire at the end of the year. The reason for this choice is to maximize their lump-sum annual leave payment. If you were to carry 240 hours of annual leave (the carryover ceiling for most employees) into the 2010 leave year and not use one hour of that leave or the annual leave you accrue during the year, you would have a total of 448 hours of annual leave at the end of the 2010 leave year.
This example assumes that you are accruing leave at the rate of 8 hour per pay period, as most prospective retirees are. In January it is easy to resolve to not use a single hour of A/L during the year. By June it is getting harder and harder to keep that resolution.
Think of what you could do with a payment equal to 448 hours of annual leave:
- If you still have a mortgage, you could pay it off (or at least pay it down).
- If you chose to spend the lump sum payment for living expenses, it would allow you to wait longer to tap your TSP or apply for Social Security.
- If you’ve planned well, you can use the leave payment for the trip of a lifetime, give it to your children, or donate it to charity.
The choice of the actual date to retire can be affected by the retirement system to which you belong.
Under FERS, you must be off the rolls for the entire month in order to receive an annuity for that month. For example, if your last day was December 31, 2010, you would receive a retirement payment on (or about) February 1, 2011 and that payment would cover the month of January 2011. Leave year 2010 ends on Saturday, January 1, 2011.
As New Year’s Day is a federal holiday, the "in-lieu of date" for the holiday falls on December 31, 2010. That would be the ideal date for a FERS employee to retire in 2010, if their goal was the maximization of their lump-sum annual leave payment.
Under CSRS, you may retire up to and including the 3rd of a month and still receive a pro-rated annuity for that month. For example, if your last day was January 3, 2011, you would receive a retirement payment (covering January 4th through 31st) on (or about) February 1, 2011. However, based on when the leave year ends, in 2010 the ideal date for a CSRS employee to retire is December 31st. "Why not wait until January 3rd?" you ask.
If you retire on December 31, 2010, you will receive a full annuity for the month of January; but if you wait until January 3rd, you forfeit 3 days of your annuity. What do you gain by forfeiting 3 days of your annuity? One day of pay is all you would receive. January 1 and 2 are non-pay days (remember, the holiday fell on December 31, 2009); therefore, the only pay you would receive would be for Monday, January 3rd.
In almost all instances, three days of CSRS retirement (in retirement you are paid for each day of the month) will pay you more than one day of work (while employed you are only paid for the days you work).
Now let’s spend some time discussing the lump-sum leave payment.
Most retiring federal employees have the value of their lump-sum leave payment computed as if they had begun to take the leave on the first work day after their retirement and continued taking the leave until it was depleted.
For someone retiring on December 31, 2010, the next work day would be January 3, 2011 – the day of the comparability increase (assuming we get one next year). Their entire lump-sum payment would be calculated at the next years’ rate. In addition, if you leave on December 31, 2010, you would not receive your lump-sum payment until 2011 when, presumably, you would be in a lower tax bracket.
There are several items that will not be deducted from a lump-sum leave payment:
- Retirement contributions (CSRS, FERS, CSRS Offset)
- Federal insurance (health, life, etc.)
- TSP contributions (under current law)
Now let’s look at some possible exceptions to the "rules of thumb" we looked at above.
- An employee under NSPS needs to be on the rolls in order to receive a bonus payment. The bonus payments are given in the early part of the following year. This might cause an NSPS employee to wait for the bonus, rather than take the larger leave payment.
- An employee under NSPS will have the amount of their lump-sum leave payment computed on their salary as of their last day of employment. This might cause an NSPS employee to wait until they have a higher salary on which to base the leave payment.
- If special category employees (e.g., law enforcement, firefighter, etc) retire before the year in which they reach the age of 55, they will be subject to a 10% early withdrawal penalty until they reach 59 ½ on anything they take from the TSP. (IRS rule 72(t) provides relief in certain situations). This might cause a special category employee to wait until the year in which they turn 55 to retire.
- Of course there are a lot of individual reasons people choose dates other than near the end of the year to retire
